Financing Your Custom Dream Home When You Own Land
A Guide to Land Equity, Lenders, & The Right Timing
Building your custom dream home is an exciting proposition but the process to go from construction loan to mortgage can be quite confusing. If you already own the land you want to build on you are in a unique position to use your land as leverage to build. In this circumstance what you will be looking for is a “construction to permit loan”. This type of loan will allow you to use your land as collateral and the process will turn your construction loan into a standard mortgage when your custom home is complete.
Every lender is different, and you have several options available to you. Your first stop should be at the banks you already have relationships with. The longer you have been with the bank, the longer they know your financial history, and the more likely they are to give you favorable terms on your construction loan. However, just because you’ve been with your bank for a long time doesn’t mean they even offer construction loans. And when you’re looking for a construction loan you need to be prepared that the loan will NOT cover the full cost of construction. Most construction loans will cover 75% of the appraised value of the home. Leaving you to come up with the 25% difference, unless you own the land you’re building on and can use the land as equity. Land equity will take the 25% burden off your shoulder and allow you to focus on building the custom home of your dreams. Some banks will offer the same interest rate for the entire length of the loan, while others will have a different rate for the construction part than the mortgage part. So again, it pays to shop around.
Don’t just examine local banks for your construction loan lending. Well established builders, such as Putnam Builders, who have been building for over 50 years, have established relationships with lenders that specialize in construction loans. Your builder may be able to offer you more than one financing option, whereas a bank will only be able to offer you one path. One major benefit of financing through your builder is that you won’t be acting as a middleman between your lender and the builder. This eliminates the risk of construction delays, and delays in permits and final approvals.
The Right Timing
As construction begins you’ll likely be paying just the interest rate. This means as your home is being built your payments will continue to increase until your construction loan is converted into a traditional mortgage. Construction loans also typically carry a higher interest rate than traditional mortgage loans due to the bank’s risk. Construction loans also are limited to a certain timeframe—6 to 12 months. This can be risky if you don’t hire a builder with experience. If your construction period ends and you haven’t moved in you will be paying your mortgage payment and your rent. This can become a cashflow problem for may households, so be sure to examine your options carefully and select a builder with plenty of experience.
If you own land and are considering building your custom dream home, contact Putnam Builders to talk about your available options to finance your home.
Putnam Builders has been building custom homes on the Gulf Coast of Texas and surrounding areas since 1963. We would love the opportunity to discuss your custom home ideas in our design studio in Bacliff, TX or in the comfort of your own home. Please contact us at 281-339-0838 or request a free consultation.